Legal Advisory on Debt Recovery Strategies

The practice of obtaining money due by people or organizations that have not fulfilled their financial commitments is known as debt recovery. It's critical to take a methodical and lawful approach to debt collection in order to safeguard your interests and, if relevant, preserve good business connections.

Significance of Debt Recovery

It is impossible to overestimate the importance of debt collection for several reasons. To begin with, since bank funds are meant for public use and business endeavours that substantially impact people, a delay in releasing embezzled cash may make it more difficult for financial services. Second, debt recovery is crucial to the bank's efficient operation since non-performing assets, or NPAs, harm its profitability. Thirdly, a bank financial crisis may majorly impact all parties involved, including management, investors, and staff. Fourth, excessive non-performing assets (NPAs) may damage the bank's image and deter investors.

A bank's return on investment may also be negatively impacted by non-performing assets (NPAs). Financial institutions may suffer losses due to delayed debt recovery since it may prevent interest on capital, which could adversely affect their profitability.

Strategies for Debt Recovery

Debt Recovery Tribunal

In India, a specialized court or quasi-legal organization known as a "Debt Recovery Tribunal (DRT)" handles cases pertaining to the recovery of debts from borrowers who are in default. The "Recovery of Debts Due to Banks and Financial Institutions Act of 1993" was the legislation that established it. The primary function of DRTs is to facilitate the prompt settlement of debt recovery claims by providing a specialized forum for their adjudication.

What are Debt Recovery Tribunals (DRT)?

• The Presiding Officer of the Tribunal and the Chairperson of the Appellate Tribunal are the same individuals who serve as the heads of DRTs and DRATs, which the Central Government appoints.
• DRTs have the authority to issue comprehensive orders that go beyond the Civil Procedure Code. It is capable of hearing cross-claims, set-offs, and cross-suits.
• DRTs were given the authority to decide cases involving claims for up to 10 lakh rupees. In 2018, this cap was increased to twenty lakh rupees.
• Following adjudication, the DRT certifies the amount owed by the borrower and issues an order and Recovery Certificate. Recovery Officers carry this out in accordance with the income tax recovery process.

Jurisdiction of Debt Recovery Tribunals

• Banks and other financial organizations may submit applications to DRTs in order to recover debts owed to them.
• If the defendant resides or conducts business within the local limits of the Tribunal's jurisdiction, the banks may submit an application there.
• The Supreme Court and High Court prohibit all other courts from making decisions about debt recovery.

Legal Framework

The Debt Recovery Tribunal (DRT) accepts appeals and requests, which can be submitted directly or through the SARFAESI procedure.

Through Application process

• The lender must apply to the DRT and make the required payment in order to start the debt collection procedure through this method. The success of this approach depends on choosing the right DRT.
• There are currently 39 DRTs spread over 22 distinct locations. The requirements for choosing a DRT to submit an application are specified in Section 19 of the RDDBFI Act.
• A bank or other financial institution may approach a DRT with jurisdiction over the financial institution's operating region. Furthermore, if the cause of action, in whole or in part, is within the jurisdiction of a certain DRT, the lender may submit an application with that DRT.

Through SARFAESI Act

• A secured creditor may also apply to the DRT under the SARFAESI Act in order to recover unpaid debts. In order to give secured creditors a way to recover their unpaid balances without the need for outside assistance or legal action, the Act acknowledges the need to strengthen their rights.
• When a secured creditor classifies a loan as a non-performing asset (NPA), the borrower receives a notification under Section 13(2) of the SARFAESI Act that pertains to the amount which must be returned in full within 60 days. In the event that the borrower defaults on the loan, the secured creditor may exercise the rights granted by Section 13(4) of the Act, including the authority to seize the secured asset, lease it, transfer it, or choose a manager.
• The creditors may file a claim with the DRT to recover the outstanding balance if the collateral asset is unable to meet the borrower's commitments to them.
• Under certain circumstances, the borrower may contest any action taken by the creditor pursuant to Section 13(4) by filing an appeal under Section 17 of the SARFAESI Act.
• It is crucial to remember that, under certain restrictions, the SARFAESI Act gives creditors the authority to seize and liquidate the secured assets of defaulters without the involvement of courts or tribunals. However, if borrowers believe that this process has infringed their rights, they may pursue legal action.

Arbitration/ Negotiation

Negotiation in debt recovery is a critical process where creditors and debtors engage in discussions to reach a mutually acceptable arrangement for the repayment of a debt that is in default.

• Creditors and debtors negotiate on the terms of repayment, including the amount, interest rates, and the duration of the repayment plan.
• Debtors may offer a lump-sum settlement, which is often less than the total debt owed, in exchange for the creditor forgiving the remaining portion of the debt.
• Creditors and debtors may agree to restructure the debt by modifying the terms, extending the repayment period, reducing interest rates, or altering the payment schedule.
• An unbiased third party may facilitate the negotiation process to help both parties reach a fair resolution.

We assist you with

• Provide legal guidance on debt recovery strategies, helping you understand the legal framework and regulations related to debt collection in your jurisdiction.
• We offer negotiation and settlement services to help you reach an agreement with the debtors.
• Preparing legal documents assist you with legal representation in court.
• Ensure that your debt recovery practices comply with relevant regulations, including consumer protection laws and data privacy regulations.
• Analyze the risks associated with different debt recovery strategies and help you make informed decisions.